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Trade and Wages

By William Reinsch

August 13, 2018

One eternal element of the debate on trade policy is blame. Bad things are happening in our economy. Is trade responsible for them? Trade skeptics say “yes”—trade promotes a race to the bottom. Free traders say “no”—trade is a scapegoat for a lot of other things that are going on. Of course, where you place blame begins with what you think is wrong. It is probably not correct to blame trade for climate change, though no doubt some have tried. Likewise, it is safe to conclude that trade did not cause our problems with Iran, nor will trade cure them.

Instead of blaming trade for big things like that, let’s spend a few minutes looking at something a bit simpler but which is directly related to the growing skepticism about trade—wages. The argument is that trade depresses wages by facilitating ferocious global competition for market share that forces companies to reduce costs ruthlessly in order to survive, including by sending jobs offshore. The victim in that scenario is the average worker whose wages are kept low to keep costs down. Conveniently, thanks to the Pew Research Center, there is recent data that addresses this issue. It shows that over more than 50 years, while paychecks have risen in nominal terms, in constant 2018 dollars they have changed very little. By that measure, the average hourly wage in 1964 was $20.27, and in 2018 it is $22.65. This is an increase of less than 12% over 54 years, which works out to 0.2% per year—not an impressive performance.

And there is more. Data also shows what others have reported—that higher-income workers have benefited more than lower-income workers. As Pew reports:

Since 2000, usual weekly wages have risen 3% (in real terms) among workers in the lowest tenth of the earnings distribution… But among people in the top tenth of the distribution, real wages have risen a cumulative 15.7%… nearly five times the usual weekly earnings of the bottom tenth…”

This data, of course, tells what is happening. It does not tell us why it is happening. We are left to figure that out for ourselves. Currently, with the unemployment rate hovering around 4 percent and with manufacturers complaining about growing difficulty in finding workers, one would think wage increases would start to kick in. Instead there appears so far to be only a modest bump. Experts (and non-experts) have offered a variety of explanations for wage stagnation in addition to trade:

Compensation is in more than cash, and, in fact, other benefit costs (health insurance, retirement account contributions, transit subsidies, etc.) have been rising faster than wages, which may be constraining employers’ willingness to raise wages.

The decline in the number of workers represented by labor unions means fewer gains from collective bargaining.

Worker educational attainment has not kept up with the demands of more technologically sophisticated jobs.

Increases in the number of noncompete clauses limit job-switching, and licensing requirements restrict entry into certain occupations.

Well-documented declines in manufacturing employment have led to a shift to work in lower-wage sectors.

Low productivity growth is the economists’ general answer to what we are currently experiencing.

My personal favorite is that today’s CEO’s are too focused on stock prices and returns to shareholders rather than the long-term health of their company and its workers to the detriment of both.

There will never be consensus on the causes of wage stagnation, except possibly in the history books 100 years from now, when it won’t do us any good. The correct answer is probably all of the above, along with trade, which cannot be absolved of all blame for the pressures of competing in the global marketplace.

The lesson for policy makers is to remember the Serenity Prayer and figure out the things we can change and focus on them rather than beating our heads against the wall over things we cannot change. Clearly, globalization is in the latter category. We may not like it—the president clearly does not—but it’s here, and it’s not going to go away. (We can discuss the good things it has brought, like out-of-season fruits and vegetables and cool new technologies, another time.) Trying to return to a world where everything is made domestically is unrealistic at best and disastrous at worst, and it will not produce the wage increases the president would like. We would be far better off looking at the items on the list above that we can change and doing something about those.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).